Specialist lawyer Lutz Auffenberg and his law firm Fin Law have specialized in the field of fintech and innovative technologies. In particular, blockchain technology and its regulation is the focus of his work. In his guest post he addresses the question of when the exemption from the capital adequacy requirements applies to crypto custodians and crypto securities registrars.
This article is first on the Fin Law Blog appeared.
When introducing the financial services of the crypto custody business, the legislature opted for generous supervisory privileges for crypto custodian service providers as long as they do not offer any other banking or financial services besides the crypto custody business. Pure crypto custodians can therefore benefit from attractive exemptions with regard to the equity ratios actually applicable to financial services institutions in accordance with the EU Capital Adequacy Regulation (CRR), capital buffer and liquidity requirements, the issuing of large loans and their remuneration systems for employees. Especially the relief with regard to the equity base is of particular importance for crypto custodians, especially since the crypto assets kept in custody would otherwise have to be deposited with equity. The legislature introduced an identical exception this year for pure crypto securities registry administrators. But are the exemptions also applicable if an institution offers crypto custody and crypto securities registry?
Capital requirements: The exception is intended for specialist providers
The exceptions, in particular from the capital requirements of the CRR, were created as a compromise solution when the crypto custody business was introduced. The previously favored idea of the legislature was a ring-fencing solution, according to which only companies that do not offer any other banking or financial services should receive permission for the crypto custody business. The argument in favor of ring fencing was the fear of mixing up the IT risks of the crypto custody business with the IT risks of other banking and financial services. The ring fencing would have meant a considerable restriction of the fundamental rights protected occupational freedom, which is why it was ultimately refrained from. With the creation of privileges for crypto custodians, an incentive should nevertheless be set in the market to only provide crypto custody through separate specialist companies. For the crypto securities registry administrators, the legislature decided directly to let them benefit from the exemptions if they do not provide any other banking or financial services.
Do the exceptions also apply to institutes?
The wording of the Banking Act privileges financial services institutions that do not provide any other financial services in the sense of the Banking Act apart from crypto custody business or crypto securities registry. Since, according to the wording, only one or the other service may be provided, financial service institutions that provide both financial services would fall out of the exemption, even if they do not otherwise conduct any activities requiring a license. The Federal Government’s justification for the law does not help in this context either and does not contain any explanation of this constellation. From a legal point of view, however, there are very valid arguments that, despite the conflicting wording, such companies should be able to benefit from the exceptional circumstances, because crypto securities registry administrators will not be directly or indirectly involved in financial instrument transactions. They are mere registrars who ultimately only offer a technical service that is subject to special regulatory requirements. The application of capital requirements, capital buffer or liquidity requirements as with transaction-involved financial services institutions would be difficult to justify and inappropriate. However, the decisive factor will still be the interpretation by BaFin, which as far as can be seen has not yet commented publicly on this issue.